Net Operating Income (NOI) Calculator
Your Net Operating Income (NOI) is: $0.00
Understanding Net Operating Income (NOI)
Net Operating Income (NOI) is a crucial metric in real estate investment. It represents the profitability of an income-generating property after accounting for all operating expenses, but before accounting for debt service (mortgage payments) and income taxes. Essentially, NOI tells you how much money a property is producing from its operations alone.
Why is NOI Important?
- Profitability Assessment: NOI is the primary indicator of a property's operational profitability. A higher NOI generally means a more profitable property.
- Valuation: Investors and appraisers often use NOI to estimate a property's value. The capitalization rate (Cap Rate), calculated as NOI divided by the property's market value, is a common valuation method.
- Loan Underwriting: Lenders use NOI to determine a property's ability to cover mortgage payments. The Debt Service Coverage Ratio (DSCR), which compares NOI to the mortgage payment, is a key factor in loan approval.
- Comparison: NOI allows investors to compare the performance of different properties, regardless of their financing structures.
Key Components of NOI Calculation:
1. Gross Potential Income (GPI):
This is the total rental income a property could generate if it were 100% occupied at market rates. For residential properties, this would be the sum of all rents for all units. For commercial properties, it's the total rent from all leases.
2. Vacancy and Credit Loss:
This accounts for periods when units are vacant and unrented, or when tenants fail to pay their rent (credit loss). It's typically expressed as a percentage of GPI. A realistic vacancy rate should be based on local market conditions.
3. Gross Operating Income (GOI):
This is calculated by subtracting vacancy and credit loss from the Gross Potential Income. It represents the actual anticipated rental income.
GOI = Gross Potential Income - Vacancy and Credit Loss
4. Operating Expenses:
These are all the costs associated with running and maintaining the property. They do *not* include mortgage principal and interest payments, depreciation, amortization, capital expenditures (major improvements like a new roof), or income taxes. Common operating expenses include:
- Property taxes
- Property insurance
- Utilities (if paid by the owner)
- Property management fees
- Regular maintenance and repairs
- Janitorial services
- Landscaping
- Administrative costs
5. Net Operating Income (NOI):
This is the final calculation, where total operating expenses are subtracted from the Gross Operating Income.
NOI = Gross Operating Income - Total Operating Expenses
Example Calculation:
Let's consider a small apartment building:
- Annual Rental Income (if fully occupied): $120,000
- Estimated Annual Vacancy Loss (e.g., 5%): $6,000
- Total Annual Operating Expenses (property taxes, insurance, repairs, management fees, etc.): $40,000
First, calculate the Gross Operating Income (GOI):
GOI = $120,000 (Annual Rental Income) - $6,000 (Vacancy Loss) = $114,000
Next, calculate the Net Operating Income (NOI):
NOI = $114,000 (GOI) - $40,000 (Operating Expenses) = $74,000
So, the Net Operating Income for this property is $74,000 per year. This $74,000 is the profit generated by the property's operations before considering any mortgage payments or income taxes.